Impact of wind-hydro dynamics on electricity price: A seasonal spatial econometric analysis

Abstract

Hydro and wind are both commonly deployed renewable sources of electricity. Wind is intermittent and unpredictable to a large degree. Hydro depends on seasonal rainfall patterns, although storage may offer scope to spread the risk associated with dry seasons. We investigate the impact of intermittent wind generation, coupled with a given hydro capacity, on wholesale electricity prices, accounting for both spatial and seasonal effects. Results from a spatial Durbin model provide evidence of significant negative spill-over effects of wind generation on wholesale nodal prices. After robustness analysis with alternative spatial weight matrices, we provide estimates of the seasonal impact of wind generation on nodal prices using a transmission weight matrix. We evaluate seasonal nodal price effects during dry periods and wet periods in New Zealand's hydro-dominated electricity market. Results show that the price reduction associated with a 10% increase in wind penetration varies across seasons, ranging from $0.48 per MWh in winter in 2012 to $3.05 per MWh in spring. The largest price reduction effect of 3.05 is found for the wet season in spring 2012, but the variance change is 3.6 which is less than 5.24 for the dry season in summer 2012. This evidence reveals that increased wind generation reduces nodal prices, as expected, but also increases the variance in nodal prices, particularly during a dry season. Thus, while a wind-hydro system is shown as a favourable low-carbon combination during wet seasons, without backup generation the system remains susceptible to price volatility. We further suggest policy recommendations to ensure the reduction of price volatility and the continuity of electricity supply during dry periods.